New York (HedgeCo.Net) – The Hennessee Hedge Fund Index lost -0.18% in October (+1.89% YTD), while the S&P 500 gained +2.32% (+9.18% YTD), the Dow Jones Industrial Average rose +2.04% (+4.91% YTD), and the NASDAQ Composite Index jumped +3.06% (+10.87% YTD). Bonds were also positive on the month, as the Barclays Aggregate Bond Index increased +0.98% (+5.11% YTD).
“The Hennessee Hedge Fund Index (-0.18%) declined due to market hedges that have been in place to protect against down months which have been fewer than historical experience due to the Fed’s unprecedented monetary easing.” commented Charles Gradante, Co-Founder of Hennessee Group LLC. “The conclusion of the QE program is a key concern of most managers with many focused on the global slowdown (especially Germany and Japan) and the impact on American international companies including a decline in the energy sector.”
“The top three strategies for the month were Healthcare and Biotech (+2.03%), Asia – Pacific (+2.00%) and Growth (+1.39%).” highlighted Charles Gradante. “The bottom three strategies for the month were Short Biased (-2.14%), Opportunistic (-2.08%) and Multiple Arbitrage (-1.80%).”
During October, the VIX experienced a roller coast ride. Starting the month near 14, volatility soon spiked and the VIX rose above 25, a gain of over 75%. Volatility remained elevated, however, the VIX quickly retraced and ended the month near where it started down near 14. Normally, fundamental stock picking on the long and short side of the portfolio would create respectable returns in a market such as this…but it did not. Fundamentally strong and weak stocks correlated as the VIX shot up and as it came down. Some of this phenomenon is due to the movement of sector ETFs which include baskets of both strong and weak stocks.
Equity long/short hedge funds were positive for the month, as the Hennessee Long/Short Equity Index gained +0.44% (+2.78% YTD). The best performing sectors were utilities (+7.91%), health care (+5.26%), and industrials (+3.65%), while underperforming sectors were energy (-2.99%), materials (-2.62%) and telecommunication services (-0.19%). The healthcare sector continues to be the best performing sector for the year having gained +21.26% YTD through October, while energy is bringing up the rear, having lost -1.59% YTD through October.
“One manager capsulated the overall attitude by stating ‘the world wants to deflate while governments want to inflate’.” reported Charles Gradante. “In October, managers shifted concerns from a possible Fed hike by mid-2015 to the four E’s (energy, Ebola, earnings and Europe). At the moment a rate hike in 2014 seems less likely but the frequent churning of global economic conditions is unprecedented creating large monthly shifts in market sentiment.”
The Hennessee Arbitrage/Event Driven Index decreased -1.15% in October (+2.00% YTD). The Barclays Aggregate Bond Index gained +0.98% (+5.11% YTD) as interest rates were lower for the month. High yield increased as the Merrill Lynch High Yield Master II Index gained +1.14% in October (+4.79% YTD). High yield spreads were lower in October, decreasing 10 basis points to end the month 430 basis points over treasuries. The Hennessee Distressed Index was negative in October by -1.42% (+1.12% YTD). The Hennessee Merger Arbitrage Index lost -1.62% in October (+0.78% YTD). The Hennessee Convertible Arbitrage Index was negative for the month, losing -0.44% for the month (+2.75% YTD).
“The end of QE has done nothing to reduce the Fed’s balance sheet (bonds owned) nor money supply (largely bank deposits at the fed). One manager lamented ‘what will happen when the Fed needs to reduce money supply. We have no experience with that transition’.” commented Charles Gradante.
The Hennessee Global/Macro Index lost -0.21% in October (+0.32% YTD). The Dow Jones UBS Commodity Index was lower in October, dropping -0.81% (-6.37% YTD), while the MSCI ACWI Index gained +0.62% (+2.67% YTD) and the MSCI EAFE Index dropped -1.50% (-5.08% YTD). The Hennessee International Index lost -0.61% in October (-2.15%). The MSCI Emerging Market Index rose +1.07% (+1.33% YTD), while hedge fund managers underperformed the index, as the Hennessee Emerging Market Index lost -1.04% (+0.73% YTD).
“Macro managers had wide swings in their portfolio. In October, these managers were whip-sawed in commodities and credit. Long-oil and short the over-the-counter dollar were losers. Bets on credit widening after S&P cut France’s ‘outlook’ from stable to negative while keeping its AA rating did not work as spreads tightened and European sovereign debt traded at yields below U.S. comparable debt.” added Charles Gradante.
The Hennessee Macro Index decreased -0.13% for the month of October (+0.92% YTD). Fixed income managers were positive in October as bond yields were lower for the month with the 10-Year U.S. Treasury ending the month at 2.35%, down 17 basis point from 2.52% in September. Commodities were negative for October, with gold falling -3.0%, WTI oil dropping -11.67% and European Brent Blend Crude sinking -11.09%. Natural gas was also lower in October, ending the month with a loss of -7.73%.